December 23, 2013 1:11 pm

Activist hedge fund managers get board
welcome

By Stephen Foley in New
York

Activist hedge fund managers are sitting on a record amount of money to
deploy against underperforming companies. They are targeting larger
businesses than ever before, and they have never had so much success in
securing what they want.

The very presence of this particular breed of hedge fund managers on a share
register used to prompt a company to put up the barricades. Now they are
finding more directors receptive to the traditional activist ideas of
returning capital, spinning off businesses and are even inviting activists’
representatives on to the board.

Jana Partners, the $8bn fund run by Barry Rosenstein, launched five activist
campaigns against US companies this year, all of which have resulted in
change without so far resorting to a proxy fight for board seats.
Safeway, the
grocery chain,
agreed to Jana’s
suggestion that it jettison underperforming stores, for example,
and
QEP Resources,
an oil and gas explorer, acceded to demands to split itself in two.

“Good ideas usually win out over the long run,” Mr Rosenstein says. “What is
changing is that more and more boards are seeing the inevitable outcome and
skipping the perfunctory battle, and we benefited from that.”

Institutional Shareholder Services calculates that 68 per cent of proxy
fights for board representatives resulted in success for activists this
year, and that does not include cases where the agitators were invited on to
the board before launching a fight. The number was 43 per cent last year.

Activists have an easier path to victory, now. Years of corporate governance
campaigners chipping away have paid off and American companies maintain
fewer of the staggered board elections that blocked change and fewer of the
poison pill defences that blocked activist stakebuilding. Activists also
have the ear of the traditional large fund management groups, which are
themselves pressing management to be more responsive to shareholder
concerns.

For their part, and with notable exceptions, activists have been toning down
the invective against existing managers and working harder to present
credible plans and to propose serious board candidates.

“Activism in general has become more serious,” says David Rosewater, partner
at Schulte Roth & Zabel, who has advised several activist hedge funds. “Many
activist situations never see the light of day or settle shortly after it
becomes clear that the activist is serious about pursuing it. Settlements
far outnumber proxy fights.”

Bill Ackman’s Pershing Square took its biggest ever activist position in
July when it paid $2.2bn for a stake in industrial gases group
Air Products.
Within three months Mr Ackman had persuaded the board to
retire its chairman
John McGlade and give Pershing Square control over two directorships – all
without uttering a negative word about the company.

Carl Icahn,
whose lieutenants were invited this month on to the board of medical testing
company
Hologic,
says: “People sometimes say that I’m not mellow, but we really try to get
friendly when we are on boards.

“Boards are starting to conclude, mostly because of the success companies
have had when we got on the board, that we really help and ask, ‘Why go
through the fight?’ Their attitude is changing.”

Assets managed by activist hedge funds surpassed $90bn in the fourth
quarter, according to HFR, almost triple the total five years ago, giving
these investors more firepower than ever. Returns, however, have been
prosaic, even while global stock markets went on a tear, raising the
possibility that improved governance across corporate America might have
reduced the rich pickings once on offer.

Companies and their investment bank advisers are increasingly conducting
“fire drills”
for an activist attack, and in the process identifying strategic weaknesses
that they fix even before a hedge fund shows up.

Mr Ackman, in a speech while visiting the UK in the autumn, tipped Europe as
a more lucrative ground for activism in the coming years.

Japan is also attracting attention thanks to the climate of reform ushered
in by Prime Minister Shinzo Abe. Dan Loeb’s Third Point took $1bn-plus
stakes in
Sony and
SoftBank in
2013, though his overture to Sony suggesting it partially spin off its
entertainment business was rebuffed.

Some smaller activist funds are focusing on smaller companies, where the
reduction in Wall Street research coverage has been most acute. Cliff
Robbins, founder and chief executive of Blue Harbour, which manages just
under $2bn, pitches his fund as a free advisory service to the companies in
which it invests.

“Investment bankers don’t wake up in the morning thinking, ‘How can I help
this $2bn company?’” Mr Robbins says.

Others, however, see plenty of opportunity still in shaking up the largest
corporations in the world. They cite the example of
Apple, where
a demand by David Einhorn’s Greenlight Capital that the iPhone maker issue
preference shares to investors was defeated in February but was quickly
followed by the company announcing an extra $55bn return of cash.

“There are very high levels of cash on corporate balance sheets, which plays
to the activists’ theme of optimising capital structure,” says Doug
Braunstein, vice-chairman at
JPMorgan Chase,
adding that the rising stock market is also separating the wheat from the
chaff and making underperforming companies more visible.

“We are actually at the beginning of a long-term sustainable level of
activity. It is an attractive environment for picking potential targets,” he
says.

This Forum program is open, free of charge,
to anyone concerned with investor interests in the
development of marketplace standards for expanded access to
information for securities valuation and shareholder voting
decisions. As stated
in the posted
Conditions of Participation, the
Forum's purpose is to provide decision-makers with access to
information and a free exchange of views on the issues
presented in the program's Forum
Summary. Each
participant is expected to make independent use of
information obtained through the Forum, subject to the
privacy rights of other participants. It is a Forum
rule that participants will not be identified or quoted
without their explicit permission.

This Forum program was initiated to address
issues and objectives defined by participants in the 2010 "E-Meetings"
program relevant to broad public interests in marketplace
practices, rather than investor decisions relating to only a
single company. The Forum may therefore invite program
support of several companies that can provide both expertise
and examples of leadership relating to the issues being
addressed.

The information provided to
Forum participants is intended for their private reference,
and permission has not been granted for the republishing of
any copyrighted material. The material presented on this web
site is the responsibility of
Gary Lutin, as chairman of the Shareholder Forum.

Shareholder Forum™
is a trademark owned by The Shareholder Forum, Inc., for the
programs conducted since 1999 to support investor access to
decision-making information. It should be noted that we have
no responsibility for the services that Broadridge Financial
Solutions, Inc., introduced for review in the Forum's
2010 "E-Meetings" program and has since been offering
with the “Shareholder Forum” name, and we have asked
Broadridge to use a different name that does not suggest our
support or endorsement.